CommVault Systems, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and nine months ended December 31, 2010, the third quarter and first nine months of fiscal 2011. CommVault develops and sells Simpana data and information management software and related services. The unaudited interim financial statements are in thousands of dollars; amounts below are generally shown in millions. The company reported approximately 13,500 registered customers and released Simpana 9 in August 2010.
Financial performance
| Metric | Three months ended Dec. 31, 2010 | Year-over-year | Nine months ended Dec. 31, 2010 | Year-over-year |
|---|---|---|---|---|
| Software revenue | $41.8m | +$6.5m; +19% | $105.8m | +$8.0m; +8% |
| Services revenue | $41.9m | +$6.4m; +18% | $119.3m | +$19.6m; +20% |
| Total revenue | $83.6m | +$12.9m; +18% | $225.2m | +$27.6m; +14% |
| Gross margin | $73.5m; 88% of revenue | 87% in prior year | $196.0m; 87% of revenue | 87% in prior year |
| Operating income | $10.5m | $9.1m in prior year | $23.4m | $21.7m in prior year |
| Net income | $7.3m | $5.4m in prior year | $16.2m | $12.6m in prior year |
| Diluted EPS | $0.16 | $0.12 in prior year | $0.35 | $0.28 in prior year |
For the nine-month period, services were 53% of revenue versus 50% a year earlier, while software was 47% versus 50%. Software gross margin was 98.3% versus 97.6%; services gross margin was 77.0% versus 75.8%. The overall gross margin was approximately 87% in both nine-month periods. Sales and marketing expense rose 18% to $118.3m, and research and development expense rose 9% to $26.9m.
Cash flow, liquidity and debt
- Cash and cash equivalents were $191.4m at December 31, 2010, up from $169.5m at March 31; short-term investments were $2.2m. Working capital was $160.5m, up $17.3m from fiscal year-end.
- Nine-month operating cash flow was $33.5m, compared with $35.1m in the prior-year period. Investing activities used $0.1m; financing activities used $13.1m. Cash increased $21.9m to $191.4m.
- The company had no borrowings under its $30m credit facility and reported compliance with its covenants. The facility matures in July 2012. No other debt balance is reported in the supplied filing text.
- During the nine months, CommVault repurchased $31.5m of stock. As of December 31, $48.3m remained authorized for repurchase through March 31, 2012. The filing reports no stock purchases during the December quarter.
Material changes, outlook and risks
- Quarterly software and services revenue each grew 18% year over year. For the nine months, services growth outpaced software growth, primarily due to customer support agreements associated with new sales and renewals.
- International software revenue growth exceeded U.S. growth: 14% versus 4% for the nine months. Management attributed growth to expansion in Europe, Asia, Australia and Canada. Enterprise transactions above $0.1m represented 47% of nine-month software revenue, versus 45% a year earlier.
- Management expected enterprise software transactions and related revenue to increase through fiscal 2011, while noting that the timing and size of individual deals are difficult to forecast. It anticipated continued investment in product development, sales, marketing and global infrastructure. No specific full-year revenue or earnings guidance is provided in the filing text.
- Management identified cloud computing, virtualization and evolving customer needs as product opportunities, but noted that new features and solutions may not be widely adopted. Software can become obsolete amid changing standards, requirements and competition.
- Sales concentration is significant: Dell agreements generated 23% of nine-month revenue and Arrow generated approximately 25%. The company also relies substantially on indirect channels; termination or reduced sales by key partners could adversely affect results. About 38% of revenue came from outside the U.S., creating foreign-currency exposure.
- The nine-month effective tax rate was 32%, versus 43% in the prior-year period. The current period included approximately $1.1m of tax benefit from the expiration of a foreign statute of limitations, as well as reinstatement of the research and development tax credit. Unrecognized tax benefits were $4.9m, with $1.2m of related accrued interest and penalties.
- Management said existing cash, operating cash flow and the credit facility should meet anticipated needs for at least 12 months, while cautioning that future financing may not be available on acceptable terms. No pending litigation expected to have a material adverse effect was reported. Disclosure controls were assessed as effective; no material change in internal control was reported.
Important facts for investors to verify
- Whether services-led growth and renewal support revenue can sustain overall growth as software revenue grew more slowly over the nine-month period.
- Customer and channel concentration, especially the revenue and receivables exposure to Dell and Arrow, and the resilience of these relationships.
- Operating cash flow declined year over year despite higher revenue and net income; assess working-capital movements, including receivables and deferred revenue.
- The scale and duration of stock-based compensation: $11.1m expense for nine months and $37.9m of unrecognized compensation expected over a weighted-average 2.76 years.
- Tax-rate sustainability, including the one-time reserve release, remaining uncertain tax positions and the absence of a valuation allowance against deferred tax assets.
- Execution and adoption risks around Simpana 9, cloud-related products, international expansion and ongoing product investment.